The United States District Court for the Northern District of California recently issued an interesting decision indicating that forum selection clauses in corporate bylaws may largely be effective, despite the court’s rejection of a company-friendly forum selection clause on the specific facts of the case. The court in Galaviz v. Berg held that a forum selection provision in the bylaws of the Oracle software company—one providing that a shareholder may pursue a derivative lawsuit against Oracle or its directors only in Delaware—was not effective to defeat the California choice of forum by the plaintiffs. But the court reached this determination not on any theory that such clauses are, in general, unenforceable, but only that they may not be retroactive.
A forum selection clause can be a highly effective way for a company to organize and manage its litigation docket. Generally, such clauses are considered contractual and, if not unconscionable, enforceable. With respect to matters of the internal affairs of corporations, it can also make sense to seek to have a jurisdiction with expertise about the law at issue decide such matters. But in the absence of an undecided or new question for the jurisdiction of incorporation, courts have been hesitant to direct such disputes to that forum.
A forum selection clause in a corporate charter or bylaws would, however, seem to be a logical idea, and the Delaware Court of Chancery has hinted at its approval of such a development in the law. Indeed, because Delaware law provides for personal jurisdiction over directors of a Delaware company in Delaware even if those directors have no other contact with the state, such a clause makes practical sense as well. But few companies have tried such forum selection clauses and, until Galaviz, no court had addressed a challenge to them.
In Galaviz, the California federal court refused to uphold Oracle’s forum selection bylaw to require a shareholder to move a derivative lawsuit from California to Delaware because such a bylaw “stands on a different footing” than a typical contractual forum selection clause. The court reasoned in particular that “there is no element of mutual consent to the forum choice at all, at least with respect to shareholders who purchased their shares prior to the time the bylaw was adopted.”
This last caveat is important. The plaintiff’s claim in Galaviz was that Oracle’s directors had breached their fiduciary duties by failing to prevent Oracle from billing millions of dollars in overcharges to the federal government for eight years beginning in 1998.
After the alleged overbilling was discovered, but “well before” any lawsuits were filed, “Oracle’s Board of Directors adopted a resolution amending the corporate bylaws to add a forum-selection provision for derivative suits.” This meant that “the venue provision was unilaterally adopted by the directors who are defendants in th[e] [derivative] action, after the majority of the purported wrongdoing is alleged to have occurred, and without the consent of existing shareholders who acquired their shares when no such bylaw was in effect.” Therefore, the court could not “disregard the plaintiffs’ choice of forum, which Oracle does not contend is otherwise improper on any grounds….”
But the court did not declare the bylaw illegal or unconscionable on its face. This means that, even under the reasoning in Galaviz, such bylaws should at a minimum be enforceable against at least some shareholders as to activity occurring after the adoption of the bylaw. Indeed, there is a strong likelihood that other courts would go even further, because the court’s reasoning in Galaviz is questionable, at best. Every shareholder should be deemed to have constructive notice of the terms of his or her corporate ownership and be subject to the charter and bylaw limitations in existence at the time when the shares are purchased. If those charter and bylaw provisions permit amendment of a bylaw in a way that would allow for a forum selection clause, it is hard to understand why that amendment should not be binding to the same extent as any other amendment.
The choice of a forum for shareholder suits could be particularly important with respect to enforcement of state laws considered “more limiting” than the baseline Delaware corporate law. The Galaviz decision provides hope that such choices made by corporate directors in good faith will be upheld in the future.
- Nos. C 10-3392, C 10-4233, 2011 U.S. Dist. LEXIS 1626 (N.D. Cal. Jan. 3, 2011) [Back to reference]
- See generally, e.g., 123 A.L.R. Fed. 323 (2009). [Back to reference]
- See, e.g., Seinfeld v. Bailey, No. 12155/92 (N.Y. Sup. Ct. Apr. 9, 1993), aff’d No. 50637 (N.Y. App. Div. Dec. 23, 1993). [Back to reference]
- See In re Revlon, Inc. S’holders Litig., 990 A.2d 940, 960 (Del. Ch. 2010) (“[I]f boards of directors and stockholders believe that a particular forum would provide an efficient and value-promoting locus for dispute resolution, then corporations are free to respond with charter provisions selecting an exclusive forum for intra-entity disputes.”). [Back to reference]
- See 10 Del. Code Ann. § 3114 (2010) [Back to reference]
- 2011 U.S. Dist. LEXIS 1626 at *2. [Back to reference]
- Id. [Back to reference]
- See also Frascella v. Oracle Corp., Case No. 07-cv-529 (E.D.Va. 2007). [Back to reference]
- 2011 U.S. Dist. LEXIS 1626 at *3-4. [Back to reference]
- Id. at *12. [Back to reference]
- Id. [Back to reference]
- See, e.g., Kirleis v. Dickie, McCamey & Chilcote, P.C., 560 F.3d 156, 162–63 (3d Cir. 2009). [Back to reference]
- See, e.g., 13.1 Va. Code Ann. § 672.4(C) (2010) (limiting discovery in derivative suits). [Back to reference]